Benefit Programs

Corporate Audit and Evaluation Branch
November 2006

Table of Contents

Executive Summary

One of the Canada Revenue Agency's (CRA) two strategic outcomes is to ensure that eligible families and individuals receive timely and accurate benefit payments. Introduced in 1990 and 1993 respectively, the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit and the Canada Child Tax Benefit (CCTB) are tax-free payments made to eligible individuals. These payments are dependent on family size and income and each year approximately $3 billion in GST/HST credit payments is paid to 9.5 million recipients and $9 billion in CCTB and related benefits is paid to 3 million families.

The CCTB is a tax-free monthly payment sent to eligible families to assist with the cost of raising children under the age of 18. The CCTB may also include monthly payments such as the National Child Benefit Supplement (NCBS) for low-income families with children, and the Child Disability Benefit (CDB), which provides financial assistance for qualified families caring for children with severe and prolonged mental or physical impairments.

The GST/HST credit is a tax-free quarterly payment made to eligible low and modest income Canadians to offset the costs of paying the GST or HST on their purchases.

The Benefit Programs Directorate (BPD) of the Assessment and Benefits Services (A&BS) Branch administers the CCTB and the GST/HST credit. BPD's core objective, in cooperation with federal, provincial, and territorial partners, is to develop and coordinate national, provincial and territorial programs related to the identification, determination, validation and payment of benefits and credits. Some aspects of GST/HST credit eligibility and entitlement are reliant on information stored in relation to the CCTB; therefore, compliance statements regarding CCTB have a direct impact on GST/HST credit compliance and other benefit and tax programs.

Objective: The objective of this audit was to examine and assess the effectiveness, efficiency and adequacy of management of the CCTB and GST/HST credit programs.

The examination phase was conducted from May 2005 to May 2006.

The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.

Conclusion: The audit found that the management of the BPD program was highly effective in meeting service goals, primarily timely and accurate processing of applications, adjustments and the related benefit payments. However, the compliance controls in place for both CCTB and GST/HST credit need to be improved to adequately managethe risk of erroneous payments.

As reflected in the CRA annual report, BPD was meeting timeliness service standards for 99% of benefit payments and 98% for processing of applications/account adjustments. Internal Audit (IA) reviewed a representative sample of 3,856 files and found that there was a high degree of compliance to procedures and with the exception of the findings detailed in this report, there were no significant weaknesses.

Given that benefit recipients include some of the most economically vulnerable Canadians, it is particularly important that the risk of error be mitigated prior to the issuance of a payment as collection can impose significant financial hardship.

BPD has developed a comprehensive compliance strategy, however it has not yet been fully implemented.

The Quality Review process within BPD is determined at the local level, which leads to an inconsistent approach between the Tax Centres (TC). There is no national policy providing guidelines for the review process or for minimum levels of review.

Analysis of the performance indicator standards (e.g. files per hour) indicates that they are inconsistent between TCs, contributing to differences in productivity reporting and difficulty in measuring overall program performance. In addition, budgets allocated to the TCs show wide variations between offices and to actual results.

Although BPD has made progress in the sharing of information with some provinces, in the area of vital statistics for example, continued effort is needed to ensure that CRA fully leverages these partnerships to obtain information that can help validate claims.

BPD accepted IA's findings and recommendations and have prepared action plans to address the identified areas of improvement and strengthen the delivery of this program.

Action Plan: BPD will develop a national quality review strategy beginning in early 2007 and will explore current best practices. The strategy, including a national policy and standards, will be developed in the 2007-2008 fiscal year.

BPD will set national production standards, as well as additional measures such as efficiency (cost per case) and effectiveness (accuracy/quality). These standardized processes will be implemented so that beginning with the 2009-2010 fiscal year, TCs will be able to measure and report their production in a consistent manner.

BPD management has agreed to commit resources to develop a formal plan to fully implement the outstanding recommendations from the Compliance Strategy and to monitor and evaluate the strategy's effectiveness. Timelines will be built into the implementation plan that will be completed by the end of the 2006-2007 fiscal period.

BPD will initiate new take-up studies for CCTB and GST/HST credit in 2008, when the 2006 census material becomes available and will re-examine the designs of both studies in order to produce more robust results. In the interim, BPD will conduct a further review of this issue, to analyze the potential risk. This could include a measurement study to validate children. Results of such a review would be available in 2008.

BPD endorses a risk-based approach and the need to balance front and back-end validities. BPD will develop an interim strategy to verify applications without birth certificates until a long-term strategy is available. Procedures will be sent to the TCs by the end of the 2006-2007 fiscal period to manually select accounts for validation. BPD will use the data collected to complete a risk assessment and to identify which system enhancements would be most effective and efficient.

Introduction

One of the Canada Revenue Agency's (CRA) two strategic outcomes is to ensure that eligible families and individuals receive timely and accurate benefit payments. Introduced in 1990 and 1993 respectively, the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit and the Canada Child Tax Benefit (CCTB) are tax-free payments made to eligible individuals. These payments are dependent on family size and income, and each year approximately $3 billion in GST/HST credit payments is paid to 9.5 million recipients and $9 billion in CCTB and related benefits is paid to 3 million families.

The CCTB is a tax-free monthly payment sent to eligible families to assist with the cost of raising children under the age of 18. The CCTB may also include monthly payments such as the National Child Benefit Supplement (NCBS) for low-income families with children, and the Child Disability Benefit (CDB), which provides financial assistance for qualified families caring for children with severe and prolonged mental or physical impairments.

The GST/HST credit is a tax-free quarterly payment made to eligible low and modest income Canadians to offset the costs of paying the GST or HST on their purchases.

The Benefit Programs Directorate (BPD) of the Assessment and Benefits Services (A&BS) Branch administers the CCTB and the GST/HST credit. BPD's core objective, in cooperation with federal, provincial, and territorial partners, is to develop and coordinate national, provincial and territorial programs related to the identification, determination, validation and payment of benefits and credits.

Given that CRA's management of accounts receivable emphasizes a risk management approach, the substantial number of small balances of CCTB and GST/HST credit overpayments is considered a low priority. This influences Internal Audit's (IA) recommendations in relation to controls prior to issuance of benefits. This risk is compounded due to the difficulty in recovering the associated debt created by making erroneous payments. Debt recovery resources are mostly concentrated on large debts.

Some aspects of GST/HST credit eligibility and entitlement are reliant on information stored in relation to the CCTB; therefore compliance statements regarding CCTB have a direct impact on GST/HST credit compliance and other benefit and tax programs.

The Office of the Auditor General (OAG) issued a report in 1996 on the CCTB and GST/HST credit programs. A subsequent follow up report was issued in 2001. The CRA also conducted an internal audit on the CCTB program and issued a report in 1998. The following issues were noted in the reports:

Focus of the Audit

The objective of the audit was to examine and assess the effectiveness, efficiency and adequacy of management of the CCTB and GST/HST credit programs.

The examination phase of the audit took place from May 2005 to May 2006. Interviews were held with BPD staff in Headquarters (HQ) and in the following Tax Centres (TCs): Surrey, Winnipeg, Sudbury, St. John's. A comprehensive file review was performed on various CCTB and GST/HST credit workloads and projects from the 2004-2005 fiscal year.

The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.

Findings, Recommendations and Action Plans

1.0 Management Operations

BPD management has a complete set of controls to ensure timely payment of benefits and these measures were found to be generally effective, efficient and adequate.

IA reviewed a statistically representative sample of 3,856 files. This review consisted of 2,900 files from a population of 874,618 for six different workflows in the 2004-2005 fiscal year. In addition, IA reviewed 956 files from the entire population (7,721,692) of routine CCTB and/or GST/HST credit cases.

1.1 Timely and Accurate Payment of Benefits

BPD places an emphasis on paying benefits in a timely manner and has set a standard to process applications or adjustments before the end of the second month after they are received.

As reflected in the CRA annual report, BPD programs met timeliness service standards for 99% of benefit payments and 98% of initial applications/account adjustments. File review did not identify problems with the timeliness and accuracy of payment and application processing. File review of routine CCTB applications indicated that they were processed, on average, 15 days from date of receipt, thus providing timely payment of benefits ahead of the service standard.

The audit found that BPD provides effective support to staff in the TC. The information was clear, timely and file review identified a high degree of compliance to procedures. Documentation review and interviews also identified effective communication between HQ and TCs and in particular, the information provided through the benefits intranet site was complete (manuals, bulletins, reports etc).

1.2 Quality

Within BPD there are two different processes used to verify the quality of work: Quality Assurance (QA) and Quality Review (QR).

The QA process that BPD has developed and implemented is a sound, strategic, process through which HQ measures accuracy and processing timeframes at TCs. The QA process is conducted periodically which includes file review, and is formalized through a detailed report. To better communicate key issues identified through QA, BPD also produces a “quick facts” sheet that summarizes each QA review.

The QR process however, would benefit from greater direction from HQ. BPD has mandated the local tax centre management to deliver ongoing QR, which consists of review of a certain percentage of claims processed by employees. This review is to ensure procedures for the processing of files are being followed. The audit found that the level of review varied significantly from TC to TC and employee-to-employee. In particular, TCs occasionally reduced the review rate to 0% to speed processing and ease bottlenecks. However, setting the threshold at 0% defeats the purpose of the control at a time where the pressure of a deadline may increase the risk of error. A more effective approach would see HQ providing guidelines and setting a minimum level of review.

Recommendation

BPD (HQ) should develop a national policy and standards for quality review of its programs, to ensure that review is performed on a consistent basis and that a minimum level of review is applied. In addition BPD should formalize a strategy to implement this policy. BPD should analyse and use QR results to identify trends and improve programs.

Action Plan

BPD will initiate research and consult with the Information Technology Branch and tax centre management in order to develop a national quality review strategy. The research and consultation stage will begin in early 2007 and will explore current best practices. The strategy, including a national policy and standards, will be developed in the 2007-2008 fiscal year.

1.3 Information Management

Within CRA, there are statutory requirements and policy guidelines regarding the retention of documents. BPD is currently working on a draft national filing policy to assist processing centres in meeting these requirements in relation to CCTB and GSTC. File review and interviews by IA identified the following issues with respect to Information Management.

Policies and procedures for the filing of documents were largely determined by local management and not consistent from office to office. Depending on the TC and the nature of the document, items were filed in permanent documents, in a locally designed manual filing system (by chronological date, Globus case number, or Social Insurance Number), or sent to classified waste. Also, the length of time that documents are retained varied by TC. There is a risk that locally determined approaches will not meet HQ guidelines and standardising the best approach nationally may increase overall efficiency.

In reviewing Validation & Controls (V&C) files during the course of this audit, IA noted that there was no paper or electronic documentation available for 85% of the overlimit files. The absence of the documentation complicates the review process.

The Validation & Controls Manual contains a comprehensive Marital Status Screener Sheet, and the Benefits Operations Manual contains a CCTB Care Overlap Screener Sheet. These screener sheets are not mandatory. However, they are valuable tools to aid assessors' decision making and provide enhanced audit trails for quality and management controls to be effective.

Recommendations

BPD should finalize the procedures relating to its national filing policy, currently in draft form, and schedule distribution and implementation dates.

To ensure consistency and provide better audit trails, BPD should develop and establish a national policy outlining procedures and guidelines (with examples) for the documentation of reasons for screened-out V&C files.

BPD should make the use of screener sheets (such as the Marital Status Screener Sheet and CCTB Care Overlap Screener Sheet) mandatory for complex V&C workloads.

Action Plan

New Policies and Procedures are being finalized and will be issued to the field by February 2007.

BPD agrees to develop procedures and guidelines for the documentation of reasons for screened-out V&C files. The new procedures will be in the field by March 2007.

BPD issued new procedures in October 2006 to advise field staff that the use of screener sheets is mandatory for the more complex Spousal Matching Project.

1.4 Processing Efficiency

In managing processing efficiency for benefit programs, there are three variables; files completed per hour, direct costs and indirect costs. There are significant variances in the definition and achievement of files per hour results among TCs for benefit programs. Interviews with managers in the TCs confirmed inconsistencies in the interpretation of a “unit of production” as well as differing approaches to the accounting for indirect time which can range up to 40% of activity costs. At the time of the audit, TCs were in effect setting their own, differing, productivity goals and related performance standards and as a result BPD could not perform direct efficiency analysis among TCs, except for comparing workload inventories.

These office-to-office differences complicate the annual budgeting process as BPD relies on cost per unit to determine the budget allocated to each TC. The budget cost-per-unit figure for each TC is not related to the prior year's results, as most budget rates were set above the prior year's actual rate. With the exception of the Surrey TC, the 2004-2005 actual rates for all TCs were well below the budget and also below the prior year's actual rates. IA analysed fiscal 2004-2005 allocations and found that the targets set by BPD varied widely from office to office as did actual results. For the Surrey TC, the 2003-2004 actual cost per CCTB application was $10.85, the 2004-2005 budget allocation was $8.36, and the 2004-2005 actual cost was $10.47. For the St. John's TC the 2003-2004 actual cost per CCTB application was $7.08, the 2004-2005 budget allocation was $10.32, and the 2004-2005 actual cost was $6.11.

Recommendations

BPD should set national production standards (e.g. files per hour) for all TCs and define units of output to ensure that individual TCs are measuring and reporting their production in a consistent manner.

BPD should set national cost per unit standards to ensure that budgeted amounts are reasonable and reflect program needs.

Action Plan

BPD will set national production standards, as well as additional measures such as efficiency (cost per case) and effectiveness (accuracy/quality).

First steps undertaken include the segregation of overhead costs from direct productivity comparisons. This will be fully integrated starting with the 2007-2008 fiscal year.

For the long term, BPD will engage experts in Process Management to conduct a comprehensive review of all program activities for the purpose of identifying and standardizing best practices for optimum efficiency and effectiveness. BPD is well underway with this process in the Disability Tax Credit program and will start on the correspondence workflows in November 2006. An intensive review of all program activities will be completed before the end of fiscal 2008-2009.

Following the completion of all program reviews, standardized processes will be implemented so that beginning with the 2009-2010 fiscal year, TCs will be able to measure and report their production in a consistent manner.

1.5 Confidential Information

The 1999 IA report indicated that protecting confidential client information required attention. Interviews in HQ and TCs established that BPD has taken measures to address client confidentiality issues such as exchange of information procedures regarding third parties and have put controls in place to ensure that this confidential information is protected.

2.0 Compliance

The primary objective of the CCTB and GST/HST credit is to provide support to eligible individuals and families. While this continues to be the main focus of these programs, efforts have been made by BPD to enhance validation activities as outlined in their compliance strategy that was finalized in August 2005. IA found that the measures contained in the strategy have yet to be fully implemented to effectively validate claims and adequately manage the risk of non-compliance.

There are three risks associated with recovering a benefit paid in error. First, CCTB and GST/HST credit legislation does not provide for interest or penalties to accrue on amounts outstanding. Second, benefit payments are relatively small amounts in comparison to other tax programs administered by the CRA and are a low priority for collection as the recovery of debt is focused on other large balances. Third, benefit recipients by definition include low and modest income Canadians who may not have assets or sources of income to rely on for repayment.

Some aspects of GST/HST credit eligibility and entitlement are reliant on information stored in relation to the CCTB; therefore compliance statements regarding CCTB have a direct impact on GST/HST credit compliance and other benefit and tax programs.

2.1 Compliance Strategy

BPD developed a comprehensive compliance strategy document, which was finalized in August 2005. The strategy is based on a comprehensive review of the BPD's compliance measures. The strategy documents the current approach, assesses its effectiveness, and lists areas that require attention and related solutions. However, although action on many recommendations is already underway, no formal plan detailing a complete list of actions and timelines for their implementation has been finalized.

Internal Audit analyzed the current compliance efforts and raised concerns with elements such as risk management and trend analysis, along with V&C program results, not being used to improve and enforce compliance. Some V&C projects address risk as identified by the TCs and HQ, however BPD is not fully evaluating and ranking risk in order to target areas where it occurs most frequently or is of the greatest magnitude. This approach is integral to effective risk management. Also, no detailed trend analysis is performed on the results of these projects to utilize this information for program improvement and compliance issues. Once implemented, the recommendations should address these issues as well as many of the other compliance issues raised over the course of this audit.

Recommendation

BPD should prepare a formal plan including deliverables and timelines to guide implementation of their compliance strategy. In addition, BPD should monitor and evaluate the strategy's effectiveness on an ongoing basis, and refine based on risk assessment and statistical analysis.

Action Plan

Since the Compliance Strategy's release in August 2005, which consisted of 15 recommendations, BPD has completed three and started work on an additional eight. As recommendations are completed, reports are prepared to evaluate the actions taken and include the dollar value impact in order to quantify the findings. Dollar results have been available from the datamart since July 2006.

BPD management has agreed to commit resources to develop a formal plan to fully implement the other outstanding recommendations from the Compliance Strategy and to monitor and evaluate the strategy's effectiveness. The strategy is an evergreen document and will be updated annually as further analysis is completed. Timelines will be built into the implementation plan that will be completed by the end of the 2006-2007 fiscal period.

2.2 Statistical Analysis

Raised by the OAG in the context of ensuring all eligible Canadians are made aware of their entitlements, a participant profile is a database of information that can be used to analyse the make up of benefit recipients. Progress has been made by BPD in the development of a CCTB participant profile and is confident that the recently deployed datamart can provide source information to develop profiles. However, additional work by BPD is required as this profile has been in draft format since August 2004.

Demographic analysis can also be used to identify areas that could be at risk for non-compliance if the recipient population does not match other sources. The key risk is that a claim could be filed for potentially non-existent children. To analyze this risk, BPD conducted a study in 1997 entitled “Verification of Enrolment”. BPD concluded from this study that there was no evidence of potentially non-existent children within the CCTB system. The study recommended that annual samples be completed to monitor compliance levels on an ongoing basis. However, these annual updates were not conducted. There is a need to use this type of data to assess and quantify the compliance risks to better prioritize action and establish the appropriate level of validation efforts.

This type of data can be compared to external sources. Such comparisons, to Statistics Canada data for example, could help identify specific demographic areas that merit more detailed analysis. This type of information should be used to refine the validation strategy and influence the degree of verification required.

Recommendation

BPD should conduct further analysis on key segments of the data from Statistics Canada and CRA to mitigate the risk that potentially non-existent children exist. In addition, BPD should establish and maintain on-going participant profiles.

Action Plan

The OAG's 1996 audit called for a profile of CCTB and GST/HST credit recipients, specifically to determine their information needs. The development of the datamart satisfies this recommendation. The datamart can and has been used to identify particular segments of the recipient base for specialized communications, and has been used to identify or analyze potentially under-represented segments of the recipient base.

BPD will initiate new take-up studies for CCTB and GST/HST credit in 2008, when the 2006 census material becomes available. BPD plans to re-examine the designs of both studies in order to produce more robust results. In the interim, BPD will conduct a further review of this issue, to analyze the potential risk. This could include a measurement study to validate children. Results of such a review would be available in 2008.

2.3 Initial Application

The CCTB application process does not require proof of birth to register a child and begin benefit payments unless the child was born outside Canada or the child is over one year old at the time the initial claim is made. Given the potential amount of benefits that can be paid until a child reaches 18, the complexities of recovering amounts paid in error, and that GSTC and other tax measures rely on the CCTB record for a child, limiting proof of birth to older children and those born outside Canada does not adequately limit the risk of error. This risk is compounded by the absence of the statistical analysis described in Section 2.2.

While additional controls would impose incremental costs on CRA and taxpayers, a file review of initial applications by IA established that in 194 of 388 (50%) cases, proof of birth was submitted whether required or not. Management has not fully assessed the risk associated with those applications that are processed without proof of birth.

The provinces hold vital information such as birth and/or death data. This information would support cost effective verification of applications upon receipt. BPD has made progress in the sharing of information with some provinces, such as these vital statistics, and recognizes that further collaboration is needed with Federal, Provincial and Territorial partners.

Recommendations

BPD should implement a validation process for claims submitted without proof of birth that is timely and mitigates risk.

BPD should develop, in collaboration with Federal, Provincial and Territorial partners, strategic solutions to validate proof of birth for all children.

Action Plan

BPD endorses a risk-based approach and the need to balance front and back-end validities. BPD has developed long and short term plans to support this commitment. In order to achieve this commitment, BPD will prepare a business case for additional funding before the end of the 2006-2007 fiscal period.

In the short-term BPD will initiate research and consult with tax centre management to determine the type of system enhancements that could be implemented to improve front-end validation. BPD will develop an interim strategy to verify applications without birth certificates until a long-term strategy is available. Procedures will be sent to the tax centres by the end of the 2006-2007 fiscal period to manually select accounts for validation. BPD will use the data collected to complete a risk assessment and to identify which system enhancements would be most effective and efficient.

BPD's Business Plan 2006-2007 to 2008-2009 makes a commitment to work with Information Technology to establish a vision for the Individual Credit Determination (ICD) system. A core “ICD Renewal” team has been formed and will in the 2006-2007 fiscal year identify gaps between the established vision and the current state of the system. More robust front-end validation will be assessed as part of ICD Renewal.

As part of a long-term plan to further improve front-end validations, BPD, via the Individual Identification Renewal Project, is working to develop a means of verifying birth information for children during the processing of benefit applications, by means of the National Routing System (NRS). This aspect of the project is in its early stages, and a timeline to develop and implement birth verification has not been formalized at this time.

2.4 High Dollar Amounts

In processing benefit payments, BPD has established a control that prompts a secondary review of benefit payments exceeding pre-determined dollar thresholds. These payments, called overlimits, appear on a system listing that is issued to the TCs for manual review prior to issuance. The current threshold amount has not been reviewed or adjusted for a number of years.

The default mode of these overlimits is to issue the cheque, even if the review has not been completed. Even though the vast majority of reviews are completed in time and of those, a majority are free from error, it would be more effective to only issue cheques flagged for review after the review has been conducted. In addition, no formal approval process is in place prior to the issuance of these payments.

The current overlimit approach provides disproportionate oversight to single large payments, such as a retroactive change in custody or claims where the recipient is claiming benefits for multiple years. Monthly payments under the threshold that are cumulatively larger disbursements are not subject to any dollar driven scrutiny. Since benefit payments can run from birth until the age of 18, the estimated payout over the duration of eligibility may be a more reliable indicator of financial risk rather than one-time payments. IA's view is that a broader risk assessment is required; the current approach is limited to the dollar value of the next cheque to be issued and does not factor total dollars at risk.

Recommendations

BPD should implement a system hold for overlimit payments to prevent their issuance until it is reviewed and should be subjected to the QR process.

Periodic review of threshold amounts should be performed.

Action Plan

BPD's Business Plan 2006-2007 to 2008-2009 makes a commitment to work with Information Technology to establish a vision for the ICD system. A core “ICD Renewal” team has been formed and in the 2006-2007 fiscal year will identify gaps between the established vision and the current state of the system. The initial work will start in November 2006. The idea of system holds will be assessed again as part of ICD Renewal.

In the interim, instructions will be issued to the field offices by the end of November 2006 to advise them to manually inhibit and/or intercept all reviewed accounts.

Validation & Controls (V&C) has started a review of the threshold amount for the Overlimit listing. Completion of the review is expected by April 2007.

BPD is also reviewing the idea of a two-stage review and approval process for the Overlimit workflow. A recommendation on this process should be completed by June 2007.

Conclusion

The audit found that the management of the BPD program was highly effective in meeting service goals, primarily timely and accurate processing of applications, adjustments and the related benefit payments. However, the compliance controls in place for both CCTB and GST/HST credit need to be improved to adequately manage the risk of erroneous payments.

Internal Audit (IA) reviewed a statistically representative sample of 3,856 files. This file review demonstrated a high degree of compliance to procedures and timeliness standards.As reflected in the CRA annual report, BPD programs met timeliness service standards for 99% of benefit payments and 98% of initial applications/account adjustments.

Improvements are required in the areas of compliance controls and productivity management. In particular, further attention is required with respect to statistical analysis of compliance risks and to the budget process.

BPD accepted IA's findings and recommendations and have prepared actions plans to address the identified areas of improvement and strengthen the delivery of this program.

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